Breaching directors duties - what happens if directors fail to comply with company law

What are the duties of directors under UK company law?

Directors have a number of legal responsibilities and duties under company law, including:

1. complying with the duties set out in the Companies Act 2006. Find out more about the duties of directors here;

2. following the company’s rules, shown in its articles of association;

3. keeping company records and reporting changes to those records;

4. filing accounts and tax returns;

5. telling shareholders if they might personally benefit from a transaction the company makes; and

6. paying corporation tax.

What are the consequences of breaching directors duties?

Breaching directors duties can lead to consequences for both directors and the company.

1. Disqualification

Directors can be disqualified from acting as a director if they fail to meet their legal responsibilities or are found to be “unfit” to be a director. ‘Unfit conduct’ includes:

• allowing a company to continue trading when it can’t pay its debts;

• not keeping proper company accounting records;

• not sending accounts and returns to Companies House;

• not paying tax owed by the company;

• becoming bankrupt; or

• using company money or assets for personal benefit.

Where someone is disqualified as a director, they could be disqualified for up to 15 years. When disqualified, they can’t:

• be a director of any company registered in the UK or an overseas company that has connections with the UK; or

• be involved in forming, marketing or running a company.

2. Termination of employment

If the director is an executive director that is also an employee of the company, the director’s employment contract will usually include a termination right in favour of the company where a director is disqualified from acting as a director or otherwise breaches its contract. This will mean that the director’s role as an employee of the company can also come to an end. Docue’s director’s service agreement includes such a clause that allows for termination for breaching director's duties.

3. Termination of appointment

For non-executive directors (i.e. directors that are not employees of the company), the legal document appointing them as a director will also usually contain a right for the company to terminate the appointment if the director is disqualified, if they cease to be a director of the company pursuant to the company’s articles, or are otherwise removed as a director of the company. Docue’s letter of appointment of a non-exclusive director includes such a provision for termination for breaching directors' duties.

4. Criminal offence

In some cases, breaching company law may be a criminal offence. For example, a breach of the requirements on corporate administration (eg, keeping company registers and making filings) in the Companies Act 2006 may amount to an offence for which the company and every officer in default may be liable.

Are there any remedies available to the company when a director breaches its duties?

Breaching directors duties can result in a loss to the company. In some cases, the company can therefore bring a claim against the defaulting director if it can show that it has suffered a loss. For example, if the director has made some personal profit that should have been accounted to the company instead, the director could be required to surrender the gain to the company.

It could also be possible for a company to seek:

• an injunction to stop the director from carrying out or continuing with the breach;

• restoration of the company’s property;

• damages by way of compensation where the director has been negligent; or

• the rescinding of a contract in which the director had an undisclosed interest.

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